SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-3671
GENERAL DYNAMICS CORPORATION
(Exact name of registrant as specified in its
charter)
Delaware 13-1673581
(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.)
3190 Fairview Park Drive, 22042-4523
Falls Church, Virginia (Zip Code)
(Address of principal
executive offices)
(703) 876-3000
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90
days. Yes X No .
Indicate the number of shares outstanding of
each of the issuer's classes of common stock, as of
the latest practicable date.
Common Stock, $1 par value - October 26, 1997 62,879,061
<PAGE>
GENERAL DYNAMICS CORPORATION
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet 2
Consolidated Statement of Earnings
(Three Months) 3
Consolidated Statement of Earnings
(Nine Months) 4
Consolidated Statement of Cash Flows 5
Notes to Unaudited Consolidated
Financial Statements 6
Item 2 - Management's Discussion and
Analysis 12
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 6 - Exhibits and Reports on Form 8-K 17
SIGNATURE 17
<PAGE>
<TABLE>
PART I
GENERAL DYNAMICS CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(Dollars in millions)
<CAPTION>
<S> <C> <C>
September 28 December 31
1997 1996
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 202 $ 516
Marketable securities 643 378
845 894
Accounts receivable 170 97
Contracts in process 583 558
Other current assets 290 309
Total Current Assets 1,888 1,858
NONCURRENT ASSETS:
Marketable securities 29 261
Leases receivable - finance
operations 199 204
Real estate held for
development 154 147
Property, plant and equipment,
net 508 441
Intangible assets 475 165
Other assets 239 223
Total Noncurrent Assets 1,604 1,441
$ 3,492 $ 3,299
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 158 $ 182
Other current liabilities 729 651
Total Current Liabilities 887 833
NONCURRENT LIABILITIES:
Long-term debt 40 38
Long-term debt - finance
operations 106 118
Other liabilities 603 596
Commitments and contingencies
(See Note G)
Total Noncurrent Liabilities 749 752
SHAREHOLDERS' EQUITY:
Common stock, including
surplus (shares issued
84,387,336) 138 109
Retained earnings 2,410 2,254
Treasury stock (shares held
1997, 21,524,524;
1996, 21,285,157) (692) (650)
Unrealized gain on
investments - 1
Total Shareholders' Equity 1,856 1,714
$ 3,492 $ 3,299
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in millions, except per share amounts)
<CAPTION>
<S> <C> <C>
Three Months Ended
September 28 September 29
1997 1996
NET SALES $ 988 $ 862
OPERATING COSTS AND EXPENSES 875 773
OPERATING EARNINGS 113 89
Interest, net 11 14
Other income (expense), net (1) -
EARNINGS BEFORE INCOME TAXES 123 103
Provision for income taxes 41 35
NET EARNINGS $ 82 $ 68
NET EARNINGS PER SHARE $ 1.30 $ 1.08
WEIGHTED AVERAGE SHARES
OUTSTANDING (in millions) 62.8 63.1
DIVIDENDS PER SHARE $ .41 $ .41
SUPPLEMENTAL INFORMATION:
General and administrative
expenses included in operating
costs and expenses $ 83 $ 65
The accompanying Notes to Unaudited Consolidated
Financial Statements are an integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in millions, except per share amounts)
<CAPTION>
<S> <C> <C>
Nine Months Ended
September 28 September 29
1997 1996
NET SALES $ 2,961 $ 2,685
OPERATING COSTS AND EXPENSES 2,632 2,424
OPERATING EARNINGS 329 261
Interest, net 28 40
Other income (expense), net (4) 2
EARNINGS BEFORE INCOME TAXES 353 303
Provision for income taxes 120 103
NET EARNINGS $ 233 $ 200
NET EARNINGS PER SHARE $ 3.71 $ 3.16
WEIGHTED AVERAGE SHARES
OUTSTANDING (in millions) 62.8 63.2
DIVIDENDS PER SHARE $ 1.23 $ 1.23
SUPPLEMENTAL INFORMATION:
General and administrative
expenses included in
operating costs and
expenses $ 239 $ 183
The accompanying Notes to Unaudited Consolidated
Financial Statements are an integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in millions)
<CAPTION>
<S> <C> <C>
Nine Months Ended
September 28 September 29
1997 1996
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings $ 233 $ 200
Adjustments to reconcile net
earnings to net cash
provided (used) by
continuing operations -
Depreciation, depletion and
amortization 64 49
Decrease (Increase) in -
Marketable securities (396) 352
Accounts receivable (21) (30)
Contracts in process 116 104
Leases receivable - finance
operations 5 4
Other current assets 11 (10)
Increase (Decrease) in -
Accounts payable and other
current liabilities (89) (26)
Current income taxes 23 67
Deferred income taxes 18 (46)
Other, net 2 (30)
Net cash provided (used) by
continuing operations (34) 634
Net cash used by discontinued
operations (31) (82)
Net Cash Provided (Used) by
Operating Activities (65) 552
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions (447) (59)
Purchases of available-for-sale
securities (360) (761)
Sales/maturities of available-
for-sale securities 725 190
Capital expenditures (50) (49)
Proceeds from the sale of assets 7 24
Other (3) -
Net Cash Used by Investing
Activities (128) (655)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of debt -
finance operations - 150
Repayment of debt - finance
operations (12) (154)
Dividends paid (77) (75)
Purchase of common stock (60) (23)
Proceeds from option exercises 28 5
Other - (6)
Net Cash Used by Financing
Activities (121) (103)
NET DECREASE IN CASH AND
EQUIVALENTS (314) (206)
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD 516 215
CASH AND EQUIVALENTS AT END
OF PERIOD $ 202 $ 9
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash payments for:
Federal income taxes $ 63 $ 134
Interest (including finance
operations) 9 9
The accompanying Notes to Unaudited Consolidated
Financial Statements are an integral part of this
statement.
</TABLE>
<PAGE>
GENERAL DYNAMICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in millions, except per share amounts)
(A) Basis of Preparation
The unaudited consolidated financial statements included herein have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Although certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, the company believes that
the disclosures included herein are adequate to make the information
presented not misleading. Operating results for the three and nine month
periods ended September 28, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997. These
unaudited consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in the company's
Annual Report on Form 10-K for the year ended December 31, 1996.
In the opinion of the company, the unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary for a fair statement of the results for the three and
nine month periods ended September 28, 1997 and September 29, 1996.
(B) Acquisitions
On November 3, 1997, the company announced an agreement to purchase
the assets of Ceridian Corporation's Computing Devices International unit
(Computing Devices) for approximately $600 in cash. The acquisition is
subject to certain conditions, including the clearance by the appropriate
governmental agencies. Computing Devices is a defense electronics and
systems integration business with presence in both the Canadian defense
electronics market and the U.S. defense market. It serves defense and other
government agencies worldwide, as well as commercial customers in selected
markets. Computing Devices provides ruggedized subsystems for harsh
environments; real-time software systems; and communication, intelligence
and surveillance systems. The acquisition is expected to be completed
by the end of the year.
Effective October 1, 1997, the company purchased the assets of
Advanced Technology Systems (ATS), formerly an operating unit of Lucent
Technologies, for approximately $284 in cash. ATS is a leading supplier of
undersea surveillance systems, signal processing systems, vibration control
systems, and related technologies for a wide range of applications. The
transaction will be accounted for under the purchase method of accounting.
Operating results of ATS will be included with those of the company beginning
in the fourth quarter.
<PAGE>
Effective January 1, 1997, the company purchased the assets of Defense
Systems and Armament Systems, formerly operating units of Lockheed Martin
Corporation, for approximately $450 in cash. Defense Systems builds light
vehicles, turrets and transmissions for combat vehicles, as well as missile
guidance and naval fire control systems. Armament Systems designs, develops
and produces advanced gun, ammunition handling and air defense systems, and
is a leader in the production of ammunition and ordnance products. The
transaction has been accounted for under the purchase method of accounting.
Operating results of Defense Systems and Armament Systems are included with
those of the company from the closing date. The excess of the purchase price
over the estimated fair value of the net tangible assets acquired,
approximately $320, has been recorded as intangible assets consisting of
contracts and programs acquired and goodwill. The intangible assets are
being amortized on a straight-line basis over periods ranging from 30 to 40
years. This allocation is based on preliminary estimates and may be revised
at a later date.
Effective March 29, 1996, the company purchased the assets of Teledyne
Vehicle Systems (Muskegon Operations), formerly an operating unit of Teledyne
Inc., for approximately $55 in cash. The transaction has been accounted for
under the purchase method of accounting. Operating results of the Muskegon
Operations are included with those of the company from the closing date.
(C) Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
September 28 December 31
1997 1996
Contracts and programs acquired $ 364 $ 149
Goodwill 111 16
$ 475 $ 165
Intangible assets are shown net of accumulated amortization of $22 and
$10 at September 28, 1997 and December 31, 1996, respectively. Intangible
assets are amortized on a straight-line basis over periods ranging from 25
to 40 years.
<PAGE>
(D) Liabilities
A summary of significant liabilities, by balance sheet caption, follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
September 28 December 31
1997 1996
Workers' compensation $ 229 $ 239
Retirement benefits 201 179
Salaries and wages 67 68
Other 232 165
Other Current Liabilities $ 729 $ 651
Accrued costs on disposed
businesses $ 214 $ 256
Retirement benefits 122 111
Coal mining related liabilities 77 77
Other 190 152
Other Liabilities $ 603 $ 596
</TABLE>
(E) Income Taxes
The company had a net deferred tax asset of $252 and $270 at
September 28, 1997 and December 31, 1996, the current portion of which was
$222 and $231, respectively, and was included in other current assets on the
Consolidated Balance Sheet. No valuation allowance was required for the
company's deferred tax assets at September 28, 1997 and December 31, 1996.
Certain issues related to the Internal Revenue Service's (IRS) audit
of the company's consolidated federal income tax returns for the years 1977
through 1986 were not resolved at the administrative level. Accordingly, the
IRS issued the company a Statutory Notice of Deficiency which the company
has been contesting in the U.S. Tax Court. As of the end of the third
quarter, all issues raised by the IRS in the Notice have been litigated and
the Court found in favor of the company on substantially all of the amount in
dispute. The IRS has the right to appeal the Court's decision; however, in
the event of an appeal, the company believes the decision would be upheld.
In addition, the company had filed refund claims totaling $355 (plus
interest) for additional research and experimentation tax credits for the
years 1981 through 1990. On October 16, 1997, as part of the Tax Court
litigation, the company and the IRS reached an agreement that settled the
tax credits for the years 1981 through 1986 for $132 (plus interest). This
agreement is subject to approval by the Joint Committee on Taxation. The
remaining claims for the years 1987 through 1990 are still being contested
at the IRS administrative level and are not covered by the settlement
agreement.
The exact amount and timing of the net refund associated with the Tax
Court litigation and related settlement is not known. However, the company
expects the net refund to exceed the amounts previously recorded and,
therefore, result in the recognition of additional tax benefits when
realization is assured.
<PAGE>
(F) Earnings Per Share
As there is no material dilution, net earnings per share is based upon
the weighted average number of common shares outstanding during each period.
(G) Commitments and Contingencies
Litigation
Claims made by and against the company regarding the development of the
Navy's A-12 aircraft are discussed in Note H.
On May 1, 1997, a jury in San Diego County rendered a verdict of $101
against the company in favor of 97 former Convair employees. In this
lawsuit, Argo, et al. v. General Dynamics, the plaintiffs alleged that
the company interfered with their right to join an earlier class action
lawsuit and concealed its plans to close its Convair division. The jury
awarded the plaintiffs a total of $1.8 in actual damages, and $99 in
punitive damages. The company is appealing the judgment. The company
believes it has substantial legal defenses, but in any case, it believes the
punitive damage award is excessive as a matter of law. While the company is
unable to assess the ultimate outcome of this matter, management currently
believes it will not have a material impact on the company's results of
operations or financial condition.
General Dynamics Corporation was served with a complaint filed in the
Circuit Court of St. Louis County, Missouri, titled Hunt, et al. v. General
Dynamics and Lloyd Thompson, seeking a declaratory judgment and rescission
of certain excess loss insurance contracts covering the company's self-
insured workers' compensation program at its Electric Boat division for the
period July 1, 1988 to June 30, 1992. The insurance contracts cover losses
of up to $30 in excess of a $40 attachment point in each of the four
policy years. The named plaintiff, Paul Hunt, is an individual suing on
behalf of himself and other individuals who are members of the Lloyd's of
London syndicates and other British insurers who have underwritten the risk.
The company does not expect that the matter will have a material impact on
the company's results of operations or financial condition.
Hughes Missile Systems Company (HMSC) has filed an amended complaint
against the company alleging breaches of certain representations and
warranties contained in the Asset Purchase Agreement dated May 8, 1992, for
the sale of the company's missile business. The amended complaint, which
was filed in the Superior Court of the State of California, seeks $42 in
damages. The company does not expect that the lawsuit will have a material
impact on the company's results of operations or financial condition.
In March 1996, the company received a judgment for $26 against the
government in General Dynamics v. U.S., a case tried in U.S. District Court
for the Central District of California. The company sued the government
under the Federal Tort Claims Act, alleging that the Defense Contract Audit
Agency negligently audited the Division Air Defense contract, which led
to the company's indictment in 1985. The indictment was later dropped. The
government has appealed the 1996 judgment. HMSC will receive 30 percent of
the net recovery as a result of its purchase of the company's missile
business in 1992. The company has not recognized any claim revenue from
this matter.
<PAGE>
The company has been sued as the "alter ego" of Asbestos
Corporation Ltd., a Canadian company, in which General Dynamics owned shares
between 1969 and 1982. General Dynamics, along with more than 50 other
defendants, has been sued in several thousand cases filed in Texas by
plaintiffs alleging exposure to asbestos. Although the gross claims
attributable to the plaintiffs cannot be estimated, including the share of
the company or any other defendant, losses arising from these matters are
largely covered by insurance. Therefore, the company does not believe
that these matters will have a material impact on the company's results of
operations or financial condition.
The company is a defendant in tort cases pending in state and federal
court in Arizona, as well as in a Comprehensive Environmental Response,
Compensation and Liability Act case. The litigation arises out of ground-
water and soil contamination at the Tucson airport. The company's
predecessor in interest, Consolidated Aircraft Company, operated a
modification center at the site during World War II. The company has
defenses to the claims, as well as a claim against the government for
indemnification. Although the company is unable to estimate its share of any
liability arising from these claims, the company believes it is entitled to
indemnity from the U.S. for any liability. Therefore, the company does not
believe the litigation will have a material impact on the company's results
of operations or financial condition.
The company is also a defendant in other lawsuits and claims and in
other investigations of varying nature. The company believes its
liabilities in these proceedings, in the aggregate, are not material to the
company's results of operations or financial condition.
Environmental
The company adopted the provisions of Statement of Position
(SOP) 96-1, "Environmental Remediation Liabilities" as of January 1, 1997.
SOP 96-1 provides authoritative guidance regarding the recognition,
measurement, display and disclosure of environmental remediation
liabilities resulting from Superfund or analogous laws and regulations. The
adoption of the statement did not have a material impact on the company's
results of operations or financial condition.
The company is directly or indirectly involved in fourteen Superfund
sites in which the company, along with other major U.S. corporations, has
been designated a potentially responsible party (PRP) by the U.S.
Environmental Protection Agency or a state environmental agency with respect
to past shipments of hazardous waste to sites now requiring environmental
cleanup. Based on a site by site analysis of the estimated quantity of
waste contributed by the company relative to the estimated total quantity
of waste, the company believes it is a small contributor and its liability
at any individual site is not material. The company is also involved in the
cleanup and remediation of various conditions at sites it currently or
formerly owned or operated.
The company measures its environmental exposure based on enacted laws
and existing regulations, and on the technology expected to be approved to
complete the remediation effort. The estimated cost to perform each of the
elements of the remediation effort is based on when those elements are
expected to be performed. Where a reasonable basis for apportionment exists
with other PRPs, the company estimates only its allowable share of the joint
and several remediation liability for a site, taking into consideration the
solvency of other participating PRPs. Based on a site by site analysis,
the company believes it has adequate accruals for any liability it may incur
arising from the sites.
<PAGE>
Other
The company was contingently liable for debt and lease guarantees and
other arrangements of approximately $80 at September 28, 1997.
(H) Termination of A-12 Program
The A-12 contract was a fixed-price incentive contract for the full-
scale development and initial production of the Navy's new carrier-based
Advanced Tactical Aircraft. The Navy terminated the company's A-12 aircraft
contract for default. Both the company and McDonnell Douglas (the
contractors) were parties to the contract with the Navy, each had full
responsibility to the Navy for performance under the contract, and both are
jointly and severally liable for potential liabilities arising from the
termination. As a consequence of the termination for default, the Navy
demanded that the contractors repay $1,352 in unliquidated progress payments,
but agreed to defer collection of the amount pending a decision by the
U.S. Court of Federal Claims on the contractors' appeal of the termination
for default, or a negotiated settlement.
The contractors filed a complaint on June 7, 1991, in the U.S. Court of
Federal Claims contesting the default termination. The suit, in effect,
seeks to convert the termination for default to a termination for convenience
of the U.S. government and seeks other legal relief. A trial on Count XVII
of the complaint, which relates to the propriety of the termination for
default, was concluded in October 1993. In December 1994, the court issued
an order vacating the termination for default. On December 19, 1995,
following a trial on the merits, the court issued an order converting the
termination for default to a termination for convenience.
The parties have concluded their litigation over incurred costs, the
final phase in the U.S. Court of Federal Claims. The contractors are
seeking a judgment of $1,202 plus interest. The U.S. government is
challenging $378 of the total costs incurred by the contractors as
unallowable. A final judgment in the U.S. Court of Federal Claims is
expected later this year. Final resolution of the A-12 litigation will
depend on the entry of final judgment, the outcome of expected appeals, and
further litigation or negotiation with the government. The company has not
recognized any claim revenue from the Navy.
The company has fully reserved the contracts in process balance
associated with the A-12 program and has accrued the company's estimated
termination liabilities, and the liability associated with pursuing
the litigation through trial. In the unlikely event that the court's
decision converting the termination to a termination for convenience is
reversed on appeal, and the contractors are ultimately found to be in default
of the A-12 contract and are required to repay all unliquidated progress
payments, additional losses of approximately $675, plus interest, may be
recognized by the company. This result is considered remote.
<PAGE>
GENERAL DYNAMICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
September 28, 1997
(Dollars in millions, except per share amounts)
Forward-Looking Statements
Management's Discussion and Analysis of the Results of Operations and
Financial Condition contains forward-looking statements that are based
on management's expectations, estimates, projections and assumptions. Words
such as "expects," "anticipates," "plans," "believes," "estimates,"
variations of such words and similar expressions are intended to identify
such forward-looking statements which include but are not limited to
projections of revenues, earnings, segment performance, cash flows and
contract awards. Such forward-looking statements are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of
1995. These statements are not guarantees of future performance and
involve certain risks and uncertainties which are difficult to predict.
Therefore, actual future results and trends may differ materially from what
is forecast in forward-looking statements due to a variety of factors,
including: the company's successful execution of internal performance plans;
performance issues with key suppliers and subcontractors; legal proceedings;
labor negotiations; changing priorities or reductions in the U.S. government
defense budget; and termination of government contracts due to unilateral
government action.
Business Segments
The company comprises two major business segments: Marine and Combat
Systems Groups, as well as miscellaneous businesses classified as Other. The
following table sets forth the net sales and operating earnings by business
segment for the three and nine month periods ending September 28, 1997 and
September 29, 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Three Month Period Nine Month Period
Inc/ Inc/
1997 1996 (Dec) 1997 1996 (Dec)
NET SALES:
Marine Group $ 547 $ 537 $ 10 $1,693 $1,763 $ (70)
Combat
Systems
Group 372 256 116 1,087 763 324
Other 69 69 - 181 159 22
$ 988 $ 862 $ 126 $2,961 $2,685 $ 276
OPERATING
EARNINGS:
Marine Group $ 55 $ 52 $ 3 $ 175 $ 161 $ 14
Combat Systems
Group 47 34 13 133 102 31
Other 11 3 8 21 (2) 23
$ 113 $ 89 $ 24 $ 329 $ 261 $ 68
</TABLE>
<PAGE>
Marine Group
Results of Operations and Outlook
Net sales decreased during the nine month period due to lower submarine
construction activity as a result of the delivery of the final Trident
submarine and the first Seawolf submarine, partially offset by increased
engineering and design work on the NSSN and increased construction volume on
the Arleigh Burke class destroyer (DDG-51) program. Operating earnings
increased during the three and nine month periods as a result of higher
margins obtained from cost reduction efforts and diminishing operating risks
as the submarine construction programs mature. The operating margin of
the Marine Group for the year is expected to be similar to that reported for
the first nine months of 1997.
Business and Market Considerations
In October, the President signed into law the Department of Defense
fiscal year 1998 (FY98) Appropriations Bill which funded all the Marine
Group's significant programs, including the NSSN, Seawolf and DDG-51
programs, consistent with the company's expectations.
The company has entered into a Team Agreement, dated February 25, 1997,
with Newport News Shipbuilding and Drydock Company (Newport News) for the
NSSN program. The Team Agreement provides that Electric Boat will be
the prime contractor on construction contracts for the NSSNs, and that
construction and assembly work will be equally shared with Newport News
through a subcontracting arrangement. Electric Boat will retain the lead
design role. The FY98 Appropriations Bill includes a provision that
authorizes the Secretary of the Navy to enter into a contract for the
construction of the first NSSN and for the advance procurement of
material for the next three NSSNs under the terms of the Team Agreement.
Details concerning construction beyond the first four NSSNs under the terms
of the Team Agreement were not addressed.
Effective October 1, 1997, the company purchased the assets of Advanced
Technology Systems (ATS), formerly an operating unit of Lucent Technologies,
for approximately $284 in cash. ATS is a leading supplier of undersea
surveillance systems, signal processing systems, vibration control systems,
and related technologies for a wide range of applications. Operating results
of ATS will be reported within the Marine Group beginning in the fourth
quarter. The acquisition is expected to be immediately accretive to earnings.
Combat Systems Group
Results of Operations and Outlook
Net sales and operating earnings increased during the three and nine
month periods due primarily to the acquisition of Defense Systems and
Armament Systems from Lockheed Martin Corporation on January 1, 1997. The
acquisition has been accretive to the company's net earnings. For a
discussion of the accounting for this transaction and related information,
see Note B to the Consolidated Financial Statements. The operating margin
of the Combat Systems Group for the year is expected to be similar to that
reported for the first nine months of 1997.
<PAGE>
Business and Market Considerations
Significant programs in which the Combat Systems Group participates, the
upgrade of M1 tanks to the M1A2 configuration, the Advanced Amphibious
Assault Vehicle, and the Crusader Self-Propelled Howitzer development
program, were funded in the FY98 Appropriations Bill consistent with the
company's expectations.
Other
Operating earnings increased during the three and nine month periods
due to the improved performance of both the aggregates business and coal
operations. The aggregates business improved due to increased sales
volumes and cost reduction efforts, while the coal operations improved due to
the suspension of mining activity at an unprofitable location.
Backlog
The following table details the backlog of each business segment as
calculated at September 28, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C>
September 28 December 31
1997 1996
Marine Group $ 6,217 $ 7,566
Combat Systems Group 2,339 2,057
Other 684 727
Total Backlog $ 9,240 $ 10,350
Funded Backlog $ 5,716 $ 6,161
</TABLE>
Total backlog represents the estimated remaining sales value of work
primarily performed under authorized U.S. government contracts. Funded
backlog represents the portion of total backlog that has been appropriated
by Congress and funded by the procuring agency. The increase in backlog at
the Combat Systems Group is due primarily to the acquisition of Defense
Systems and Armament Systems. To the extent backlog has not been funded,
there is no assurance that congressional appropriations or agency allotments
will be forthcoming. Total backlog also includes amounts for long-term coal
contracts.
Additional Financial Information
Interest, Net
Interest income decreased during the three and nine month periods due
to a decline in the average cash balance resulting from the acquisition of
Defense Systems and Armament Systems on January 1, 1997.
<PAGE>
Provision for Income Taxes
The company reached an agreement with the Internal Revenue Service,
subject to approval by the Joint Committee on Taxation, with respect to its
claim for additional research and experimentation tax credits. This
agreement is expected to have a materially favorable impact on the company's
results of operations and financial condition. For further discussion of
this and other tax matters, as well as a discussion of the net deferred tax
asset, see Note E to the Consolidated Financial Statements.
Environmental Matters
For a discussion of environmental matters and other contingencies,
see Note G to the Consolidated Financial Statements. The company's
liability, in the aggregate, with respect to these matters, is not deemed to
be material to the company's results of operations or financial condition.
New Accounting Standards
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share" in February 1997
and No. 130, "Reporting Comprehensive Income" in June 1997. SFAS 128
requires a company to present basic and diluted earnings per share amounts on
the face of the Consolidated Statement of Earnings. The company is required
to adopt the provisions of the standard during the fourth quarter of 1997,
and when adopted, will require restatement of prior years' earnings per
share. The standard will not have a material impact on historical earnings
per share reported by the company. SFAS 130 requires a company to report
comprehensive income and its components in a full set of general-purpose
financial statements. The company is required to adopt the provisions of
the standard during the first quarter of 1998, and when adopted, will require
reclassification of prior years' financial statements. There will be no
material difference between comprehensive income and historical net earnings
reported by the company.
Financial Condition
Operating Activities
Cash flows from continuing operations decreased this year over last
year due primarily to the change in the amount the company invested in
marketable securities classified as trading per SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities." Cash flows from
discontinued operations improved this year over last year due primarily to
lower allocated federal income tax payments.
Investing Activities
As discussed in Note B, the company acquired the assets of Defense
Systems and Armament Systems on January 1, 1997 for approximately $450 in
cash. Effective October 1, 1997, the company acquired the assets of ATS.
This transaction resulted in a use of cash of $284 in the fourth quarter.
On November 3, 1997, the company announced an agreement to purchase the
assets of Ceridian Corporation's Computing Devices International unit. This
transaction is expected to result in a use of cash of $600 in the fourth
quarter.
<PAGE>
The company is considering an investment of approximately $200 to
modernize the facilities at its Bath Iron Works shipyard commencing in 1998,
for the purpose of improving productivity.
Financing Activities
In 1994, the company's Board of Directors reconfirmed management's
authority to repurchase at its discretion up to three million shares of the
company's common stock. As of September 28, 1997, the company had
repurchased approximately 1.8 million shares, including approximately 0.9
million shares during 1997.
The company expects to generate sufficient funds from operations to
meet both its short-term and long-term liquidity needs. In addition, the
company has the capacity for long-term borrowings and currently has a
committed, short-term $600 line of credit.
<PAGE>
PART II
GENERAL DYNAMICS CORPORATION
OTHER INFORMATION
September 28, 1997
Item 1. Legal Proceedings
Reference is made to Note E, Income Taxes, and Note G,
Commitments and Contingencies, to the Consolidated Financial Statements
in Part I, for statements relevant to activities in the quarter covering
certain litigation to which the company is a party.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11, Statement Re Computation of Per Share Earnings
(b) Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
GENERAL DYNAMICS CORPORATION
by /s/John W. Schwartz
John W. Schwartz
Staff Vice President
and Controller
(Principal Accounting
Officer)
Dated November 5, 1997
Exhibit 11, 3rd Quarter 1997
Form 10Q, Commission File
Number 13671
<TABLE>
GENERAL DYNAMICS CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
(Dollars in millions, except per share data)
<CAPTION>
<S> <C> <C> <C> <C>
Third Quarter Nine Months
1997 1996 1997 1996
NET EARNINGS $ 82 $ 68 $ 233 $ 200
Weighted
average
common
shares
outstanding 62,835,890 63,119,640 62,823,514 63,202,704
NET EARNINGS
PER SHARE -
PRIMARY $ 1.30 $ 1.07 $ 3.69 $ 3.15
Common Shares
from above 62,835,890 63,119,640 62,823,514 63,202,704
Assumed
exercise
of options
(treasury
stock method) 439,987 273,627 324,726 234,809
63,275,877 63,393,267 63,148,240 63,437,513
NET EARNINGS
PER SHARE -
FULLY
DILUTED $ 1.30 $ 1.07 $ 3.68 $ 3.15
Common shares
from above 62,835,890 63,119,640 62,823,514 63,202,704
Assumed
exercise
of options
(treasury
stock method) 509,468 319,164 509,468 319,164
63,345,358 63,438,804 63,332,982 63,521,868
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the General Dynamics
Corporation Consolidated Balance Sheet as of September 28, 1997, and the
related consolidated Statement of Earnings for the nine months ended
September 28, 1997 and is qualified in its entirety to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-28-1997
<CASH> 202
<SECURITIES> 643
<RECEIVABLES> 170
<ALLOWANCES> 0
<INVENTORY> 583
<CURRENT-ASSETS> 1888
<PP&E> 1618
<DEPRECIATION> 1110
<TOTAL-ASSETS> 3492
<CURRENT-LIABILITIES> 887
<BONDS> 40
0
0
<COMMON> 138
<OTHER-SE> 1718
<TOTAL-LIABILITY-AND-EQUITY> 3492
<SALES> 2961
<TOTAL-REVENUES> 2961
<CGS> 2632
<TOTAL-COSTS> 2632
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 353
<INCOME-TAX> 120
<INCOME-CONTINUING> 233
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 233
<EPS-PRIMARY> 3.69
<EPS-DILUTED> 3.68
</TABLE>
